Three things Indian Americans should prepare for before the tax year ends

As tax year 2012 draws to a close, it's time for US taxpayers to make the most of current provisions and also prepare for the tax filing season ahead. We tell you the top 3 things that Indian Americans should keep in mind now.

Be prepared for expiry of Bush Tax Cuts

The Bush Era tax cuts that were introduced after the financial crisis are set to expire in 2012. Some of these include:

> The standard deduction for married couples will fall and the ceiling of the 15% bracket for married couples will fall

> The 10% tax bracket will expire, reverting to 15%

> The child tax credit will fall from $1,000 to $500

> The tax rate on long-term capital gains earned by middle- and upper-income people would rise from 15% to 20%

> The tax rate on qualified dividends earned by middle- and upper-income people would rise from 15% to ordinary wage tax rates

> Tax brackets would change: the 25% tax rate would rise to 28%; 28% to 31%; 33% to 36% and 35% to 39.6%

These are some of the major cuts in the offing. You can get more details here.

Unless the Congress votes for extension, the low tax regime will be replaced by higher rates. If the stakes are high, you may want to consult a tax planner to review your position and find ways to minimize taxes.

For instance, most experts agree that the current rate of 15% for capital gains is as good as it can get. "If someone has shares which could be disposed off before the end of the year for a gain and buy them again early next year, that would allow the gains to be taxed at the 2012 tax rate. The wash rule is applicable only for capital losses and not gains," explains Roy Vargis, an Illinois based CPA and promoter of IndianCPA.com. This might be a good time to review your Indian portfolio. Long term capital gains are tax free in India but taxed in the US for US residents, green card holders and citizens. If you have a large portfolio of Indian securities, you may want to employ this strategy to minimize your tax bill.

For those placed in the IT consulting space, Vargis says that it may be ideal to receive incentives and bonuses before the year ends. "In several IT consulting companies, employees are given control over when they can receive their bonuses," he adds.

Of the few other things to do, conversion to the Roth IRA might be a good one right now. If you have been putting off conversion to the Roth IRA, now might be a good time to act. If tax rates go up, you will benefit from conversion. If rates don't change, you have nothing to lose.

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Review your Estate Tax and Gift Tax

Another key area of tax changes is the Estate and Gift Tax. Currently the exemption limit is $5.12 million and the tax rate above the exemption limit is 35%. However, if these cuts are allowed to expire, here's what might happen:

> The estate tax exemptions will fall to $1 million

> The generation-skipping transfer tax exemption will fall to $1 million

> The tax rate which is at 35% will go up to 55%

> Gift life-time tax exemption will also fall to $1 million and the rate will rise to 55%

"Given the uncertainty around this, it might be prudent for individuals who are seeking to make large gifts or bequests to evaluate their situation and take action before these rates expire," says Vinay Navani, CPA and director of tax at New Jersey based firm Wilkin & Guttenplan, P.C.

Again, this might be important for those who plan to make gifts or inheritances of assets in India. While India does not tax inheritances and gifts, the US tax laws levy tax on a donor.

Making gifts today might be one option to consider for those who do not mind passing on their assets right away.

Get your compliance paperwork ready

"Most Non Resident Indians today have started to understand the long term implications of non-compliance and have begun to report their worldwide income," says Vargis. This includes income from renting out property, interest and dividends on bank accounts and securities, capital gains etc. "As gathering these details takes time, it is important to work on it earlier than waiting until the tax filing deadline," he advices.

Moreover, with the US IRS requiring additional compliances like the Form 8938 'Statement of Foreign Financial Assets' and the Foreign Bank and Financial Account Report (FBAR), individuals need to collate values of their financial assets as on the last date of the year. For those with foreign mutual fund holdings, they would need to make additional disclosures in the form of the PFIC (Passive Foreign Investment Company) report. Read more about these compliances here: